Thursday, December 22, 2016

Occasionally, as Paul Samuelson once noted, one is tempted to write something that one can’t decide whether it’s something important, or something completely obvious. So it is here – if in doubt, go with humility and bet on the latter.

Power, in general, is the ability to impose one’s own preferences on somebody else, overriding whatever the person’s own preferences are.

So how does that come about?

It seems that there are two main ways.

The most straightforward way is to have some attribute that the other person lacks – in other words, there can be inherent differences between people. You can be stronger, or smarter, or better looking, or trained in a specific skill. This is the simplest form of power – the bully. I am stronger than you, therefore I can impose my will upon you. This kind of power is readily apparent, and understandable instinctively even to small children.

But this only gets you so far. Think about Hillary Clinton. She came close to having the ability to annihilate most of the human race with nuclear weapons. On what personal attributes did this arise? She has a certain wily cynicism, and a will to power. But she is so frail that she could barely stand up. She is so unlikable that even those voting for her now admit that nobody really liked her. She’s above average intelligence, but you could take a randomly chosen math professor from a top 200 college in the US and they’d be considerably smarter. So something is missing.

Indeed, there is a second, and broader way.

Most power comes from coordination.

Coordination at heart, is the power of other people’s beliefs. The belief among the members of a group that they will all act together, or all act at the command of a leader. The belief of the dominated group that they will be punished severely for any resistance.

The simplest form is cooperation – an explicit agreement to help each other out. This can create power even if everyone is otherwise equal. A criminal gang combined creates much more power for each of its members than they would have if they were acting alone. Four people together can gang up on another person while taking much less damage than one quarter of what they’d sustain in a one on one fight. So they have a force multiplier –the gang of four can win more than four uneven fights.

With basic co-ordination, the equivalent of ‘having inherent strength’ is having the power of numbers –inherent attributes and coordination are complements, as people generally want to coordinate with the strongest person. But co-ordination can outstrip inherent differences in numbers quite easily. Four bullies in a schoolyard can terrorize the entire rest of the student body, even though the latter are much more numerous, and their combined strength is greater. This is just another way of saying that if everyone else could coordinate, they would actually hold the power. How do they do that? How do they agree to a plan, and get everyone to stick to it? It seems like such a trivial thing to surmount, but it is in fact the entire thing.

Or if that’s trite, how did the ~35% Sunni population of Iraq rule over the ~65% Shiite population for so long? It could be that the Sunnis are better fighters, but the subsequent developments don’t seem to immediately support this – the Iraqi government may or may not survive American withdrawal, but the Shiites successfully expelled the Sunni from Baghdad, and I doubt that ISIS car bombs are sufficient to reverse this.

Beliefs often create self-fulfilling prophesies. When everyone knows that Saddam is in charge, and that dissent is ruthlessly punished, it becomes very difficult for the Shiite to all know when and how to rise up at once (even the first American arrival in 1991 wasn’t enough to generate this). The army will always be co-ordinated in their response, but the mob lacks the discipline and certainty to know that actions will be followed through. So everyone wonders if they start lobbing Molotov cocktails at the police, will the rest of the people join them, or abandon them to the tender mercies of Saddam and his industrial shredders? This uncertainty greatly benefits the incumbent government – that is to say, the better co-ordinated group.

As a result of this, smart leaders worry a lot about preventing opposition groups from organizing. Gary King’s research about Chinese internet censorship reveals that the ChiComs understand this principle very well. Most people seem to think that it’s risky to criticize the government, but this isn’t what actually gets you censored. You can say that a governor is worthless, or corrupt, or a crook. You can say that he’s having an affair, and give the name of his mistress. This kind of information is actually quite useful to the Communist party. Like any organization, they have to measure the performance of their subordinates, and promote the competent. Finding out which local officials are pissing off lots of citizens is something you’d like to know.

What you can’t say, however, is “…and so let’s go protest”. That is what gets you censored. And it turns out this holds true even for positive statements that involve collective action. “Let’s have a rally in support of the new environmental policy” also gets you censored. When lots of people turn up in the streets at once, moods can change very quickly. Remember, co-ordination (where we all think and do the same thing) doesn’t need to be co-operation, where we all explicitly agree to help each other. It’s enough if a single event makes a mob all get angry at once, there doesn’t need to be a central controlling figure or an organized plan.

This paper finally explained to me why the Chinese government was so paranoid about Falun Gong. Aren’t they just a meditation group? Probably, but it turns out it doesn’t matter. If you can get 10,000 people to all turn up at once in Tienanmen Square, you are a potential existential threat to the government, even if all you’re doing is meditating.

This is also the story of the Gulen movement in Turkey. As a mutual advancement society and cult of personality, they had strong loyalty to Gulen and each other. But so did Erdogan’s supporters, and they had the advantage of both the incumbency of government, and a superiority of numbers. So how did the Gulenists come close to pulling off a coup? They held one considerable co-ordination advantage over Erdogan – they knew who all the key Erdogan supporters were, but Erdogan didn’t know who the Gulenists were. This meant that even though Erdogan knew he was being undermined, and had the numbers to crush them, he didn’t know who to strike. So he was strong, but blind.

The story I heard (though all such stories out of Turkey are speculation) was that the key development that took place earlier in the year was that Erodgan had finally cracked the communication system by which the Gulenists were able to communicate with each other. And suddenly the game changed very quickly. Once he knew who they were, the Gulenists were in a tight spot. The story goes that they had to rush forward plans for the coup, because they knew that Erdogan was planning a big purge of them. In some sense, this was obvious – why in God’s name would you start a coup on a Friday night, rather than at 4am? Subsequent events bear this out too – within days of the coup’s failure, there were long lists of people fired or imprisoned. This means that they had at least some of the lists in advance.

But even so, it was a near thing. Because beliefs are fragile, if one can decisively change everyone else’s opinions, the Gulenists could have turned into the Baathists of Iraq, ruling over a much larger population. The key moment, as I wrote about before, was Erdogan’s facetime press conference. By getting the message out to lots of people to take to the streets, suddenly the Gulenists had a much harder time, because the government supporters now had both numbers and co-ordination – the self-fulfilling prophesy of the coup succeeding starts to turn around, people desert, and you end up dead or in prison. Until the last few months, the Gulenists looked like a very savvy model of how to build power to subvert and overthrow a government with a smaller force. Usually, guerrilla movements appeal to the numbers of the people, and their discontent. Almost pulling off a coup without popular support, and without being the army itself, is quite an impressive feat, even if they ultimately failed.

Viewed from this angle, we can suddenly see why formal systems of government are so difficult to achieve, whether this is in the form of an all-powerful king or an all-powerful constitution. Saying that the king will have absolute authority is presuming the conclusion you’re trying to reach. The king doesn’t fight off armies single-handedly, he rules because his subjects believe that it’s in their interests to follow his orders. Does this hold true for every possible order? If the order hasn’t been given yet, it might be hard to say. But if orders stop being obeyed, either he stops being an all powerful king and becomes merely one center of power in the system of government, or stops being king altogether, most likely killed by the general who disobeyed him.

We thus have a basis for Maine’s striking observation about the British crown – that some of its powers were probably lost through lack of use. If the nature of power is people’s beliefs, these are hard to measure. And while past history is a good guide to what people think now, how do you know the world hasn’t changed in the interim? Even the ruling flag must continue to be run up the flagpole from time to time in order to know that people will continue to salute.

Because cooperation requires us to agree upon a plan, it usually requires hierarchy. Somebody is at the top, and gives orders. This way, everyone knows what they need to do. And so gangs nearly always have a leader.

As I noted before, the first king is the king because he is a great leader of men, and able to upset the old order. And these traits get passed on to subsequent generations, giving them a fundamental advantage over other men. But still, subsequent monarchs are primarily the king simply because they are the son of the old king, and everyone believes that this is the basis for government, so orders get obeyed. In this regard, succession planning and institutional rules are very important in maintaining power. Monarchies make this process very simple, as rules of succession are familial and well-laid out. If they create bad incentives, it’s for potential offspring of the king to kill each other, but at least the general populace is relatively well insulated from such issues. One-party states, like the Chinese Communists, sometimes are able to manage the process pretty well. But this usually involves handing over power before the leader dies. Otherwise there’s uncertainty about who will take over, which can lead to infighting and difficulties when the leader dies, or mass purges in the leadup.

Moreover, the orderly handing over of power becomes incredibly important in getting leaders to step aside when the time is right. If there is a strong tradition of treating past rulers fairly, then current rulers will be more willing to step down when they get old and frail. If there is a history that rulers get killed and replaced, the incentive is a to pull a Mugabe, and hang on until they carry you out in a box. In this regard, the most important development of the American revolution was George Washington’s decision to step down after two terms, as it encouraged the other leaders to follow suit, rather than setting up a dictatorship because they knew that if they didn’t, the next guy would do it.

And finally, we have part of an answer to the puzzling fact that major political developments are often entirely unpredicted even a short period beforehand – World War I sweeping away the monarchies, for instance, or the fall of the Berlin Wall. Hemingway's observation about bankruptcy 0 that it happens gradually, then suddenly - is especially true of governments. It turns out that both ‘The government is stable’ and ‘the government has collapsed’ are self-fulfilling beliefs. As a result, discontent builds slowly, but can stay at a high level for quite a long time, because of the incumbency advantage of the self-fulfilling belief in stable government. These kinds of shifts will likely have a substantial degree of randomness to them –an East German official mistakenly announces that the border with West Berlin will be opened immediately, and this sets off an avalanche that brings down the whole system.

In other words, you could be years or months away from a seismic shift in government, and you probably wouldn’t know it.

Change beliefs and you change the power structure, because beliefs are the power structure.

Friday, December 2, 2016

Among most economists (among whom I count myself as one), free trade is a pretty strongly favoured policy.

The reasons for this are fairly good, and fairly straightforward, in the standard case for free trade.

Under the standard theory, the main basis for the benefits of free trade is comparative advantage. If Australia is relatively more efficient in producing iron ore (that is, if it has a comparative advantage in iron ore), and China is more efficient at producing manufactured goods, then at the country level both Australia and China are better off if Australia specialises in iron ore, China specialises in manufactured goods, and the two countries trade with each other. Then both countries are able to obtain more consumption of each good than they would alone, given whatever initial resources they have. This is an economic benefit, understood since David Ricardo wrote about it in 1817.

If one thinks of the economic units in terms of countries, free trade between China and Australia is Pareto improving. Both countries are made better off, and no one (in this limited model) is made worse off. This is the Holy Grail of economic policy. The optimal level of tariffs is thus zero, as restrictions on free trade harm both countries.

But if one thinks instead at the level of individuals within a country, then free trade is no longer Pareto improving relative to tariffs. In the example above, if I'm a worker in an Australian manufacturing firm which was previously protected by tariffs, and these get eliminated, then I really do get screwed. It's not just complaining - as my firm goes broke, I lose my job, and the previous skills I have are no longer economically useful in my country. Even if I get another job, I likely will have a lower future wage for quite a while, if not permanently.

The steel workers in Ohio complaining about free trade aren't just making it up. Things really did get a lot crappier when tariffs were eliminated.

But economics has an answer here. Free trade isn't Pareto improving, but it is Kaldor Hicks improving. In other words, the total gains to the economy are sufficiently large that the beneficiaries could organise a transfer payment to those who lost their jobs which would made the Ohio steel workers also better off.

As a matter of political economy, this transfer doesn't actually happen. You'd have to pay the losers from free trade a very large sum of money if they have to transition to years of unemployment, or a permanently lower future income.

Of course, this isn't really a problem of economics, more just politics. Is it the economist's fault that his prescriptions don't get followed?

So much for the standard theory. It's actually pretty good, as far as it goes. Like good economic proofs, it flows from assumptions to conclusions. If it's wrong, it's because there's something in the model that's being left out, or one of the assumptions is questionable.

There are a number of possible extensions one can make, like depreciating human capital. But to me, it's the base assumptions that are the most interesting. What are they?

We have the following:

1. Consumption is a good. You're better off consuming more goods and services than fewer goods and services, all else equal.

2a. Leisure is a good, or equivalently

or

2b. Work is a bad.

In other words, for any given level of consumption, you'd rather work less than work more.

These are not terrible assumptions. #1 seems probably true. You may hit a point of satiation with consumption, but over most ranges of wealth that people operate on, having more stuff beats having less stuff, unless the stuff poses other costs (like screwing up your children, in which case all else isn't equal).

But what about #2?

Going from a 14 hour work day to a 10 hour work day, with the same wages and consumption, is surely an improvement in welfare.

Going from a 10 hour work day to a 6 hour work day, with the same wages and consumption, is also almost surely an improvement in welfare.

But the big question is the following: is it still an improvement in welfare to go from a 6 hour work day, to a zero hour work day in perpetuity?

In other words, if your consumption stayed exactly the same, would you prefer to have some sort of job, or no job, ever?

You may think work sucks, but be careful what you wish for.

What if it turns out that people actually need some sense of purpose, some reason to get up in the morning?

Admittedly, having a job isn't always a fun purpose. But it's a structure, and a discipline, and a set of people you can interact with, and a routine that, if it works well, results in the satisfaction of providing for yourself.

What would life look like if you had basic consumption needs provided for you, no strings attached, without any need to work?

Well, as it turns out, we have many decades of data on that question. They're on display in a housing estate or ghetto near you. And the results ain't pretty. Ask Theodore Dalrymple, who wrote about this extensively:

Every few months, doctors from countries like the Philippines and India arrive fresh from the airport to work for a year's stint at my hospital. It is fascinating to observe their evolving response to British squalor.

At the start, they are uniformly enthusiastic about the care that we unsparingly and unhesitatingly give to everyone, regardless of economic status. For a couple of weeks, they think this all represents the acme of civilization, especially when they recall the horrors at home. Poverty—as they know it— has been abolished.

Before very long, though, they start to feel a vague unease. A Filipina doctor, for example, asked me why so few people seemed grateful for what was done for them. What prompted her question was an addict who, having collapsed from an accidental overdose of heroin, was brought to our hospital. He required intensive care to revive him, with doctors and nurses tending him all night. His first words to the doctor when he suddenly regained consciousness were, "Get me a fucking roll-up" (a hand-rolled cigarette). His imperious rudeness didn't arise from mere confusion: he continued to treat the staff as if they had kidnapped him and held him in the hospital against his will to perform experiments upon him. "Get me the fuck out of here!"

My doctors from Bombay, Madras, or Manila observe this kind of conduct open- mouthed. At first they assume that the cases they see are a statistical quirk, a kind of sampling error, and that given time they will encounter a better, more representative cross section of the population. Gradually, however, it dawns upon them that what they have seen is representative. When every benefit received is a right, there is no place for good manners, let alone for gratitude.

By the end of three months my doctors have, without exception, reversed their original opinion that the welfare state, as exemplified by England, represents the acme of civilization. On the contrary, they see it now as creating a miasma of subsidized apathy that blights the lives of its supposed beneficiaries. They come to realize that a system of welfare that makes no moral judgments in allocating economic rewards promotes antisocial egotism. The spiritual impoverishment of the population seems to them worse than anything they have ever known in their own countries. And what they see is all the worse, of course, because it should be so much better. The wealth that enables everyone effortlessly to have enough food should be liberating, not imprisoning. Instead, it has created a large caste of people for whom life is, in effect, a limbo in which they have nothing to hope for and nothing to fear, nothing to gain and nothing to lose. It is a life emptied of meaning.

"On the whole," said one Filipino doctor to me, "life is preferable in the slums of Manila." He said it without any illusions as to the quality of life in Manila.

I skipped the most striking descriptions of the problem, because if I started, I'd end up quoting the whole thing. Read it all, if you haven't before.

A question, dear reader.

Do you think the problems of the people described above stem from a lack of consumption? They don't have to do any work, so in a standard model, the only problem left is that they must be consuming too little.

Suppose that Dalrymple is describing his subjects in the above article honestly, and you have two policy choices to consider for the above recipients.

Option A - Increase their welfare payments by 50%

Option B - Find them a not unpleasant job for 6 hours per day, and require them to do honest work in order to receive the same welfare payments as before.

Which of these two policies would result in a larger improvement in human welfare for such people?

In the standard model, the answer is obvious. Given our assumptions, Option A is far preferable. Do you believe that?

Would it change your mind to find out that lower class whites in America (especially in rust belt parts of the US that have been worst hit by job losses from free trade) in recent decades have been so despondent that their life expectancy has actually been dropping as they kill themselves with alcohol, opiates, and suicide?

The standard answer to this is that we have an opiate problem. And a drinking problem. These are "substance abuse" issues. But why now? Alcohol was always there. Why is it only now that people decide there is no other purpose or hope in their lives, and start drinking themselves to death?

To turn these concerns back into the language of economics, the Holmes conjecture is that if leisure is not always a good, and work is not always a bad, then it is no longer obvious that the optimal level of tariffs is zero.

Sometimes, you might prefer to have some restrictions on trade in order to keep jobs in America.

But you have to be honest about why you're doing this.

Targeted tariffs won't raise consumption. They won't spur economic growth. They will lead to more expensive goods, and less consumption. David Ricardo was right on all that. Comparative advantage still exists, and be very wary of anyone who talks about free trade without acknowledging this.

But they might also lead to more employment. And this may well be worth it in terms of the quantity that the economist's social planner is meant to care about, namely total welfare.

It might lead to fewer rust belt whites killing themselves with opiates, because their communities are totally hollowed out with everybody sitting around on welfare without any purpose in their lives.

If steel products cost slightly more as a result, personally that doesn't strike me as the end of the world.

Of course, this is a cautionary note, not a case for tariffs-a-go-go. To say that the optimal level is not zero does not imply that the optimal levels is high, or across-the-board. And it's also not clear that tariffs versus free trade is the only solution to this, or even the best one.

I personally think that automation is a much bigger worry in this regard than free trade. I have similar questions about automation, which also doesn't strike me as everywhere and always welfare improving.

These aren't straightforward questions. If you ban the automobile, we get stuck with horses and carts forever.

And yet... and yet...

The Deaton and Case finding seems to me to be one of the most important findings in social science in recent years, and portends an enormous and growing problem. There are lots of workers who simply do not seem to be economically useful anymore, and in communities where lots of these people have ended up on welfare as a result of the endless grind towards replacement by robots, life is purposeless and miserable.

There are many other purposes that can be fostered - community, charity, art, religion, family.

But until we have a handle on how to solve the torrent of lives being sucked into the abyss of misery, as large as the AIDS epidemic, I remain open to a range of different policies in response.